Returns to Scale  In the long-run: all inputs are variable  Returns to Scale (RTS) shows how much output changes if we increase all inputs proportionately  This helps the firm figure out its correct size or scale in the long-run

Returns to Scale (con’t)  Keep in mind what these notions mean: Increasing RTS means that the firm gets more output per unit of input just by being bigger (greater scale)  Decreasing RTS means that the firm gets less output per unit of input just by being bigger  Reasons for increasing returns to scale?

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Returns to Scale (con’t)  Reasons for decreasing returns to scale?  Firms may exhibit increasing returns to scale at low outputs and decreasing returns to scale at high outputs

Cost: Opportunity Cost  Economic Costs : Are different from accounting costs due to opportunity cost  Opportunity Cost: The highest-valued alternative given up to make a choice  Opp. cost critical because it dries behavior  Ex: Mailing a package. Say you are paid hourly; you leave work to mail a package   You must wait in line for a half hour

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Opportunity Cost  What is the total cost of mailing the package?  Cost of postage  Opportunity cost of waiting  Is probably more costly

Opportunity Cost (con’t)  Opportunity cost of going to college.  What are total college costs?:  Tuition and fees, books  Foregone wages  Is graduate school be more or less costly in terms of opportunity costs than college?  Economic cost is the sum of opportunity cost plus

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